Syed Imran Hussain
Founder | Director | Digital Marketing | Entrepreneur
When purchasing an investment property, the main objective is to get an investment that is going to improve your financial position. To evaluate whether the investment is sound, investors rely on the yield and return of the property. Yield is a return measure for an investment over a set period of time, expressed as a percentage. A return is the change in the price of an asset, investment, or project over time, which may be represented in terms of the price change or percentage change. In this blog post, we shall discuss rental yield and return on investment and how they can help investors ascertain the profitability of their investment.
rental yield
Rental yield is the return a property investor is likely to achieve on a property through rent. It is calculated by taking the yearly rental income and dividing it by the total amount that was invested in that property expressed as a percentage. It is considered to be forward-looking as it is calculated before the actual earning comes in hand. An investor can measure potential income a property can generate through rent each year. A high rental yield equals a greater cash flow.
Rental yield is classified as gross or net yield. The gross rental yield is the income on an investment before deducting expenses. Below is a gross yield calculation example for a property in Downtown Dubai;
AED290, 000 (yearly rent)
AED290, 000 ÷ AED4, 100,000 (property value) = 0.07
0.07 x 100 = 7% gross yield
Net rental yield is a property’s income after deducting expenses such as property management fees, repairs and maintenance costs, insurance, rates, and other charges. The figure is expressed as a percentage. Below is a net yield calculation example for the same property;
AED290, 000 (annual rent).
AED290, 000 – $25,000 (annual costs) = AED265, 000
AED265, 000 ÷ AED4, 100,000 (property value) = 0.065
0.065 x 100 = 6.5% net yield
Note:
Gross yield is typically significantly higher and not necessarily a good representation of realistic profit. Net rental yield is the most accurate way of calculating your rental yield. When investing, it is a good idea to focus on properties that has low expenses. A low-maintenance property increases the chances of a high rental yield.
Return on investment (roi)
ROI is the percentage of the original purchase price that you can expect to receive back after selling the property. It is considered to be retrospective as it revolves around the amount that has already been accrued. If you sell your property for more than you paid for it, that is a capital gain. If you sell for less, it is a capital loss.
ROI can be affected by a number of factors, including location, property type, and market conditions. In general, properties in Dubai have a high ROI due to the strong demand for real estate compared to other cities like London, Singapore, Paris and New York.
A property with a high rental yield may be good for cash flow, but it does not necessarily indicate that a good ROI is achievable. While it is possible to have both strong capital growth and a high rental yield, it is not realistic. This is because when property prices go up, rental yield tend to be lower, as rental income often becomes a smaller percentage of the property’s value.
conclusion
Both strategies provide different financial rewards and risks. Ultimately, like with any major financial decision, it is essential to assess your needs and objectives and carry out your financial due diligence before deciding which strategy to adopt.
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